From Hulu to Google TV, Battle Is on in Distribution Turf War

As Online Video Content, Traditional TV Programming Converge on Multiple Platforms, Who Will Win Attention of Viewers, Advertisers?

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NEW YORK ( -- When it comes to monetizing online video content through advertising, Hulu has been a clear leader. Despite YouTube's sizable audience, the Google-owned video site has only slowly begun to carry ads, in part because of the unpredictable nature of its user-generated content. That leaves Hulu, made up exclusively of sanctioned network content, as the No. 1 safe haven for advertisers moving into the online video space.

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Partly due to Hulu's aggressive promotions, the price of internet video advertising has also risen. "Hulu's innovating in advertising models more than anyone -- they're doing new kinds of advertising and getting feedback on ads," said Forrester analyst James McQuivey.

Marketers spent $1.5 billion in 2010 (an increase of 48.1% over 2009), as estimated by eMarketer. Nearly one-third of all online ad dollars is expected to go to video in 2011. Analysts expect by 2014 that the online video market will be $5.71 billion at the high end of the estimate spectrum (eMarketer), and at the very least, $3.01 billion (Forrester Research).

And Hulu has gotten its fair share of that ad revenue -- $240 million in 2010, up from $108 million in 2009, all from the 15- and 30-second ads it runs at the beginning of and throughout each show. Hulu anticipates reaching half a billion in total revenues (advertising and subscription combined) in 2011, up from $263 million in 2010, up from $108 million in 2009.

Credit: Note: Total U.S. home/work/university locations, December 2010. Source: comScore Video Metrix

The Convergence Consulting Group of Toronto predicts that about 1.6 million U.S. households will cancel their cable subscriptions by the end of 2011, as more content becomes available online. Research firm SNL Kagan projects that 8.1 million households, or 7% of all U.S. homes with a TV, will substitute internet video for a traditional video service like cable by 2014. Still, it's not yet clear that online video can completely take the place of cable TV for many consumers. A study by Needham & Co. found that for cable viewers, at least, the internet would need to carry the four major broadcast networks to convince them to "cut the cord." Cord-cutting is a major concern among cable providers that is being addressed by the "TV Everywhere" initiative, which requires consumers to prove that they are paying cable subscribers if they want to stream any cable shows online.

In November, Hulu launched a new service, Hulu Plus. It is charging a $7.99 monthly subscription for access to particular shows, adding another revenue line.

Despite Hulu's success in generating ad revenue for its parent partners (or, ironically, because of its success gaining those viewers), ABC, NBC and Fox have begun to feel nervous that their own ratings points may suffer, with real results for Hulu. Even NBC, Hulu's initial and closest partner, has started to pull back some of the ad inventory it had previously given Hulu, giving over those spots to its own network sales team. Two of Hulu's top shows, "30 Rock" and "The Office," also are sold exclusively by NBC. With its broadcast partners shifting strategy and, in NBC's case, ownership, Hulu's future is very much in flux.

Credit: Note: Total U.S. home/work/university locations, December 2010. *Video ads include streaming-video advertising only and do not include other types of video monetization, such as overlays, branded players, matching banner ads, homepage ads, etc. **Indicates video ad network/server. Source: comScore Video Metrix

Nonetheless, Mr. McQuivey said, "Even if Hulu's owners hate it, the value of what they're learning about interactive advertising is probably too important [for them to cast it off] forever."

As the landscape continues to settle over distribution through various websites, new devices are introducing turf battles over distribution to the living room, from early entrants Boxee, Roku and Apple TV to 2010 newcomer Google TV, which has rankled traditional content creators who fear loss of revenue from cable operators if viewers opt for Google TV over cable.

The TV set -- developed with Intel, Sony and Logitech -- features Google's Android operating system found on its mobile phones, and its Chrome browser. The aim is to offer TV-set access to websites such as those produced by the Times and USA Today and music sites like Pandora and Napster, not to mention sharing tools and sites like Twitter, Flickr and Skype.

Google TV's entry is a potential threat to cable revenue for broadcast and cable networks, which get paid by the cable operators to carry their channels. If consumers go through Google TV directly to network and cable content, the operators might drop them from their systems, meaning a devastating loss of revenues to the networks, which count on such contribution for significant income.

Although TBS, TNT, CNN, Cartoon Network, CNBC and HBO movies-on-demand have agreed to distribute through Google TV (as well as web-based Netflix and Amazon video-on-demand), ABC, NBC and CBS have blocked access to their shows via Google TV.

Speaking at the UBS Global Media and Communications Conference in December 2010, CBS CEO Leslie Moonves spoke about his network's refusal to distribute through Google TV. "We are a primary provider of premium content," he said. "We are going to get paid for it."

For now, it's all a moot point -- that is, until Google TV sets hit the consumer market, which had been scheduled for the fall of 2010. On Dec. 20, then Google CEO Eric Schmidt said manufacturers had been asked to hold off on the launch while Google fixed additional software bugs.

Meanwhile, Apple has sold a middleman device for internet-to-TV streaming video since 2007, when it introduced Apple TV. The second version of Apple TV was released in September 2010 and hit unit sales of 1 million by year's end. Content available includes iTunes, YouTube, Netflix and others.

Roku may be an also-ran in the set-top device area, streaming Netflix movies from the internet to TV. It sold around 1 million units during the 2009 holiday season and was expected to sell around the same number of units by the end of 2010.

Boxee, like Google TV, rankles the networks' aims. In an odd twist of fate, it is Hulu that refuses to distribute through this device, blocking its programming from showing up there (at the behest of its network partners). However, Hulu Plus will become available through Boxee in 2011, as will Netflix content, which was previously blocked as well. At the Consumer Electronics Show, Boxee unveiled a partnership with CBS to carry full episodes of the network's shows for purchase.

Producers of web-original content have so far been more receptive to the new devices. Said Next New Networks' Podell: "We're also on Google TV, Boxee, Apple TV. We have to be there to experiment." Hulu CEO Jason Kilar asserts in a recent blog post that DVR and online viewing will only continue to grow: "Users have demonstrated that they will go to great lengths to avoid the advertising load that traditional TV places upon them." Consumers want TV to be more convenient for them, with programs that start at a time they choose, not one that is dictated to them. "Consumers also want the freedom to be able to watch TV on whatever screen is most convenient for them, be it a smartphone, a tablet, a PC, or, yes, a TV," he wrote.

As for what the future of advertising looks like, Mr. Kilar has a very clear vision: "Advertisers are increasingly expecting to present their advertising messages to just their desired audience ... and not to anyone else. For over 60 years, video advertising could only be bought via a TV show's projected audience, which served as a blunt proxy for a certain target audience. The result has been many wasted impressions and an often irrelevant experience for consumers. In the near future, advertisers will demand the ability to target their messages to people rather than targeting their messages to TV shows as proxies for people."

Mr. Kilar recognizes that content owners "need to make a fair return on their significant investment in creating content," and asserts that "content owners will license their best content in the best windows to those distributors that pay the most on a per-user, per-month basis. Content owners will bundle their content to the degree customers will respond, simply because it is in the content owners' economic interest to do so. If enough customers refuse to purchase their bundles, then the bundles will either be reduced in price/scope (possible) or dismantled (far less likely)."

Despite the introduction of Hulu Plus, Hulu will continue to have a free, ad-supported service as part of its offerings for many years to come, and that Hulu will continue to experiment with windowing to arrive at how this model can best serve content producers. And he gives a nod to TV Everywhere efforts when he writes that viewers will also be able to either subscribe to Hulu Plus, or authenticate that they already pay for TV service, in order to watch other types of content.

Adam Gerber, chief marketing officer at Quantcast, sees online video positioned as a complement to TV, needing to speak the language of TV. Others, like AOL's Jeff Levick, president-global advertising and strategy, see the ad buys coming from interactive budgets, not the TV groups yet. All agree, however, that online video is past the point of advertisers asking whether online video is viable. Instead, "Video is all across the web -- it's expected, from a consumer point of view and advertiser point of view," Mr. Levick said. "For consumers, video is TV on the web. That's the point of entry. From the advertiser side, it's becoming part of the buy with every campaign."

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